CHICAGO — Analysts who cover Chicago’s municipal debt say they took good news and bad news messages away from the city’s recent investor conference. City leaders didn’t shy away from addressing their financial challenges, particularly the pension crisis that triggered the dramatic three-notch downgrade one week earlier from Moody’s Investors Service, but some analysts left disappointed over the city’s lack of a pension solution other than awaiting state legislation.

“There was a frank discussion. They were not hiding in the sand on the issues before them, but there was no new plan,” said Richard Ciccarone, chief research officer at McDonnell Investment Management. “It’s going to be for each investor to decide the likelihood of whether the city can achieve its goals.”

The investor conference was July 25 – soon after the July 17 Moody’s downgrade that brought Chicago’s general obligation bond rating down to A3, with Detroit’s July 18 bankruptcy filing further heightening general concerns about big city solvency.

“The mayor spoke very directly about our financial challenges,” said Chicago’s chief financial officer, Lois Scott, a former public finance banker and financial advisor who has led efforts to bolster city-investor relations. “We’ve taken a posture that we want to have strong relationships with the investor community.’

Emanuel, Scott and his handpicked managers of the city’s sister agencies like the Chicago Park District, Chicago Public Schools, Chicago Transit Authority, and City Colleges of Chicago sought to address investor concerns and make their case for investor support.

Investor representatives asked about the value of the conference, which was closed to the public and press, praised the city for being candid but said they left with the same questions they came with about how the city will manage its pension quagmire without state relief.

The city’s fiscal strides since Emanuel took office in 2011 are overshadowed by the city’s pension funding shortfalls, which drove the Moody’s downgrade along with a change in the agency’s pension methodology. The city’s unfunded pension liabilities reached $19.5 billion in 2012.

Chicago’s fiscal reckoning looms in 2015 when it faces a $600 million spike in payments to its two public safety funds, fueling warnings of a $1 billion deficit heading into that budget year unless the state overhauls the employee pension system. Local government benefits and payments are set by state statute.

Scott sought to downplay the drama of the downgrade, highlighting Moody’s methodology shift.

“I think it’s important to recognize there was no new information that triggered the downgrade,” she said in a recent interview.

Chicago was among 28 local government and school credits Moody’s placed on review for possible downgrade in April following a methodology change in its approach to pension liabilities. The review reflected Moody’s view that pension obligations posed a significant potential source of credit pressure for those governments.

Moody’s lead Chicago analyst Rachel Cortez cited the updated information in the city’s comprehensive annual financial statements for 2012 that showed the pension funds’ worsening health as a central factor in the agency’s action. Though the new actuarial figures were recently released, the city publicly warned late last year that it expected its unfunded obligation to grow to as much as $20 billion by year’s end. 

Analysts said the city offered up no new plan of attack at the conference outside of elusive state legislative action on reforms that curtail benefits. Political resistance to higher taxes or fees adds to investor and analyst concerns. Demand for city services, especially spending on public safety considered crucial to maintaining the city’s healthy tax base and tourist appeal, further feeds their concerns.

The city directly brought up and then sought to quell any comparisons to Detroit by stressing Chicago’s healthy tax base and steady job and company relocation announcements, Ciccarone said.

“As an analyst I appreciate that they put the conference together and I don’t think they shied away from the challenges everyone recognizes the city faces,” said Elizabeth Foos, a municipal analyst at Morningstar Inc. “But in the same sense, we didn’t hear a lot of specific resolutions to the pension crisis” aside from the city’s position that the state must act.  Foos said the city benefits from its strong economic base and, though challenged, is nowhere near the same quandary as Detroit.

“I give them a fair amount of credit for being open about the pension” situation and for not dodging investor questions, said Shawn O’Leary, Nuveen Asset Management’s senior research analyst and manager. “What was disappointing was there was no plan articulated for meeting this pension payment spike in 2015.” 

O’Leary said the city’s lack of a plan and comments that it won’t cut critical services or double down on property taxes suggests they will seek to delay the scheduled payment spike. While that might give the city some needed immediate relief, it simply kicks the can down the road unless a comprehensive pension overhaul is adopted.

Some might argue that Chicago’s solid and improving economy and strong management presents a buying opportunity given its wider spreads, but it raises a question for some as to where to place Chicago paper, O’Leary said.

“You can’t put it in a high-quality portfolio. It has to go into a diversified fund,” O’Leary said. “The city’s trend is unsustainable; they have to change course to remain solvent. If they get pension reform done I think the credit outlook improves dramatically.”

Scott said the city is not currently pursuing fresh legislation to push off the pension spike but left the door open to pushing for such an option as part of a larger reform package. “We’ve been very clear about the need for pension reform. We have been unwilling to discuss revenue in the absence of reforms,” Scott said. “We are not going to just throw money at the problem.”

The $600 million spike is triggered by 2010 state legislation that requires the city to move from a statute-based formula to an actuarially based contribution with the goal of reaching a 90% funded ratio in its police and firefighters funds by 2040. The change will drive payments up to $1.07 billion in 2015 and $1.11 billion in 2016 from $480 million this year.


The true test of the downgrade’s impact on city borrowing levels will come this fall when it sells GOs.

The city anticipates issuing roughly $300 million of new-money in September or October with an added refunding piece depending on market conditions, according to debt manager Jeremy Fine. Water and sewer revenue bonds issues won’t sell until next year. An O’Hare Airport general airport revenue bond issue is on tap later this year following a deal under a new airport credit that priced Tuesday.

Investors said the city’s GOs were already trading at single-A levels before the downgrade, but yield penalties quickly spiked in secondary trading after the downgrade. General market jitters and concerns over Detroit’s proposed treatment of some of its GO debt and fund outflows didn’t help Chicago’s trading levels.

“Chicago’s rating cut by Moody’s earlier this month has caused the yield demand required by buyers spike by 25% on some of the city’s bonds,” Interactive Data Corp. recently reported.

Traders said they initially saw yields shoot up by 60 basis points but that has since settled. Chicago already faced interest-rate penalties in the primary market due to the penalty tacked on to paper from Illinois borrowers, depending on their credit quality and exposure to state liquidity woes.

The downgrade means Chicago’s GO rating now ranks below approximately 90% of Moody’s other public finance ratings’ based on 2012 year-end ratings. Municipal Market Advisors reported recently. “This is a significant rescaling of any credit let alone one of the largest US cities and bond issuers,” MMA said.

Chicago’s fall to the lower rungs of the single-A category contrasts to its peers among the nation’s largest cities.

New York City and Los Angeles both are rated Aa2 by Moody’s. Chicago is now in league with struggling cities like New Orleans and Newark and it’s never been rated lower.

Fitch Ratings recently put the city’s AA-minus GO and sales tax ratings on negative watch citing the pension funding shortfall. Standard & Poor’s assigns an A-plus rating and stable outlook.

The city highlighted its fiscal strides during the conference including cost cuts through management efficiencies, infrastructure investments, new jobs created by relocating companies, and plans to shed much of its annual retiree healthcare expense in the coming years although that move is being challenged by retirees. Scott said the city has made “a major dent” in its structural deficit.

“Moody’s is just one of three” rating agencies, Scott said, suggesting institutional investors increasingly “rely on their own internal research and analytics.”


All four of the city’s pension funds deteriorated in 2012 with their unfunded liabilities collectively rising to $19.5 billion from nearly $17 billion a year earlier, according to the city’s financial statements.

The city’s unfunded obligation for other post-employment benefits, i.e. retiree healthcare, was $471 million and the city spent $97.5 million to fund the program that covers 24,000 participants.

The city will pay $521 million for GO debt service this year and that rises to $623 million next year. Net GO debt rose to $8 billion last year from $5.3 billion in 2003. The city closed its books on 2012 with a more than $200 million balance but just a narrow $33.4 million of it was unassigned.

While the 2012 CAFR offers a clear view of the past year, the city’s annual financial analysis released last week illustrates the strains going forward and the picture looks grim – even under optimistic economic prospects -- without a resolution on pensions.  A $339 million deficit projected for next year grows to $1 billion in 2015 and continues upward.

Emanuel has lobbied for a pension overhaul and laid out a framework that cut benefits and was agreed to by the leadership of one of the city’s smaller unions. That plan also phased in the looming pension payment spike. Rank and file members rejected the plan.

State action to deal with Illinois’ own massive pension obligations remains at an impasse.

If such a plan is enacted, it’s expected the state would then apply the plan or some version of it to local governments. Any reforms face a legal challenge. If the city does not meet the new funding levels in 2015, the state can withhold the city’s share of income tax disbursements which totaled $283 million in 2012.

The difference between the city’s statute-based payments and the ARC has escalated. In 2003, the ARC for all four funds was $451 million compared to the statutory payment made by the city of $343 million. In 2012, the city’s statutory payment was just $440 million while the ARC had hit $1.5 billion.

Some investors suggest the city’s ace in the hole lies in its pursuit of a privatization of Midway Airport. The city remains in discussions with potential investors. Bloomberg recently reported that bidding was down to two investment groups but the city declines any comment.

State legislation requires the city spend the any proceeds on infrastructure and/or pensions. Scott said the city remains committed to directing any proceeds – after it retires Midway debt – to infrastructure.

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